If the UK is to meet its climate change targets at least cost, the Government’s stated intention, then the power sector must be largely decarbonised by 2030.
The Energy Bill had its Second Reading in Parliament last week. This again put the spotlight on Government support for the renewable sector, given the battle between the Commons and the Lords over proposed amendments to change the level of funding available, to onshore wind in particular. Meeting our climate change target has been made more feasible by a global market which is divesting from fossil fuels and investing in renewables. And additional political momentum has been provided by the global climate agreement recently reached in Paris. But meeting the target requires a great many more things besides. For example, the cost-effective pathway to decarbonisation in the UK, while keeping the lights on, demands that we deliver up to 200 TWh of new generation capacity in the 2020s to replace retiring and polluting plants.
Smarter Government intervention is needed if they want to decarbonise cost effectively. How do they do this?
The market cannot deliver this without Government intervention. The energy sector is highly regulated, and Governments immemorial have used policy to push it in the direction of their political objectives. The debate on intervention is focussed on the subsidies paid to renewables to help them build their market share, keeping development costs falling up until to the point they are cost competitive on their own. But what is often missed in the debate is a critical analysis of the way Government calculates the costs and support offered to different technologies, both renewable and non-renewable. Current methods do not count, for example, the tax breaks or ‘price support’ offered for oil and gas at the point of extraction. But they do count the subsidies granted to renewable generators hence an uneven playing field.
Forward-looking Governments must invest in technology
The energy system itself is also designed for centralised thermal plant supplying baseload power. But the system of the future will be flexible, with supply side and demand side working much more in harmony. A forward-looking Government would therefore invest in technologies such as demand side response, energy efficiency and storage to enable a flexible grid, and it should recognise a revenue stream for the services that renewables offer.
Against this background it’s clear we need a level playing field, a more flexible grid and a transparent market for investment in order to drive the transformation we need across the UK generation system. There’s booming global market for renewables investment and investors can easily move their money to other markets when we want it to come to the UK. PWC estimates that £40.8bn further investment in renewables alone is needed by 2020 to meet Government decarbonisation targets.
So, having called for additional intervention in the energy market, the Government must continue to act. It must set a clear strategy, introduce smart regulation and use incentives. It must then resist the urge to create unnecessary uncertainty by meddling with what works. Which brings us back to the Energy Bill, and sudden changes to subsidy regimes: if the Government wants to decarbonise at least cost, then it must be progressive about the technologies of the future.
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